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Beware the Headless Horseman

January 30, 2011

Brad Svrluga

I was struck Friday morning when I opened up VentureWire and read the announcement of Storenvy’s $1.5MM Series A financing.  This statement stopped me in my tracks: “co-led by Spark Capital and First Round Capital with participation from Charles River Ventures and Kleiner Perkins Caufield & Byers and a group of angels including. . .”

Not that we needed any further evidence that the venture landscape has been turned on its head in the past year or so, but man. . .a $1.5MM financing that has CRV and KP as the also ran followers?  It’s a brave new world indeed.

Storenvy CEO Jon Crawford is a lucky guy – he’s grabbed 4 of the top names in venture for his series A, plus a host of prominent angels. And I’m sure he also realizes he’s now got 4 very hungry institutional mouths to feed and answer to. Fortunately, everyone around that table has been to these movies more than a few times before. But this story got me thinking again about an issue I’ve been really worried about in the new seed and Series A landscape we’re living in these days.

I’ve seen a lot of Headless Horseman financings recently, and they scare the heck out of me.  This is the round where a whole bunch of angels, and maybe 1 or 2 (or 6!) small funds all pile into a $1-2MM round.  There’s lots of smart folks around the table that the CEO has gotten to know and like through the financing process, tons and tons of good intentions, and an impressive array of networks and relationships assembled to help the company.  So what’s the problem??


Well, the CEO is presumably in charge, but on the investor side of the table someone needs to be in charge, too.  There’s a really, really, really good reason that deals have historically had lead investors.  It’s not because one of the VCs has a huge ego and needs to be called Top Dog (well, it’s at least not always because of that. . .).  It’s because when there are multiple investors involved with a company, it can become a communications and management disaster if nobody is in charge.

It’s been said more than once that if you’re the CEO, VCs involved in your company are a lot like martinis. . .one is great, two is fantastic, three starts to become a problem, and get to four or beyond and you’re asking for trouble.

Things get complicated in early-stage companies, and at critical times it’s very, very easy to end up with too many cooks in the kitchen.  As a CEO, that can be a disaster – come to a crossroads for the company and suddenly you’re trying to herd a whole bunch of cats into a decision, or fielding anxious phone calls from all directions.  Without a strong lead investor helping to manage her co-investors through that process, you as CEO are in for a splitting headache.

The good thing about the Storenvy round – and not surprising given the pros involved – is that there is clear separation of lead investors (Spark and First Round) from non-lead (CRV & KP).  Someone (or two people, which is OK) is in charge here.  I wish I could say that about a lot of early deals I’ve seen recently.

If you’re a CEO pulling an early stage round together, make sure you work with your syndicate to identify a lead.  And once you’ve done that, manage key communications and decisions in concert with that lead.

If you’re an investor, you should want the same thing, even though it may mean not as much TLC from your favorite new CEO. Either nominate yourself, or get out of the way and accept that someone else will be in charge. Your CEO will thank you for it, and the company, and as a result you, will be much better off in the long run.


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